(MENAFN- ProactiveInvestors)
A glance at the above chart of the FTSE 100 shows equities retreated after recent data suggests that the US economy might have encountered a weaker start to the year than initially thought sending the dollar to its lowest level in three months.
US employment data from payrolls processor ADP showed just 169000 news jobs were created last month well below the 200000 forecasts and the smallest gain since January 2014. Wall Street’s gloomy tone was darkened by news that the US trade deficit had widened to $51.4 billion in March from $354 billion considerably more than expectations.
The question of equity valuations also came into focus as Janet Yellen Federal Reserve chairwoman described them as “generally quite high”. Meanwhile the weaker dollar supported commodity prices with Brent crude touching $69.6 a barrel for the first time since last December rallying over 50% from the January low.
China’s manufacturing sector slowed more than forecast last month after /Markit’s manufacturing PMI was revised down from a preliminary reading of 49.4 to 48.9 slipping further into contraction territory. Investors however took the view that the weak survey would encourage Beijing to provide more stimuli sending Asian equities higher.
Newsflow from the Eurozone continued to improve as business activity started the second quarter on solid footing. Markit’s final composite PMI seen as a good guide to growth reached 53.9 in April ahead of an earlier reading of 53.5 implying economic expansion of 0.4% in the second quarter. Greece also provided a glimmer of hope by making a small interest payment to the International Monetary Fund although European leaders dashed hopes for a deal ahead of the bigger instalment Athens must pay next week.
On a domestic front the headlines have been dominated by the most unpredictable election in a generation with pre-election uncertainty weighing on many sector of the market. Yet a shock outright victory for Prime Minister David Cameron's Conservative Party wiped away the uncertainty for investors that a hung parliament had threatened to deliver. A Conservative victory is preferable over a Labour-SNP coalition sending sterling and UK equities higher.
Meanwhile data revealed the UK services sector unexpectedly picked up speed in April countering signs that the economy was slowing. The Markit/CIPS services PMI climbed to an eight month high of 59.5 in April from 58.9 in March beating forecasts for a fall to 58.5.
Technical analysis of the FTSE 100 depicts this week’s uncertainty into the UK election with the blue-chip index breaking through support at 7025 and 6930 before gaining traction from the 100-day moving average at 6875. The oscillators have slightly further to fall until the index becomes oversold although the bullish divergence indicates there is little conviction behind this move lower.
In conclusion the outcome of the UK election should appease markets and the recent dollar weakness is largely beneficial for equities. The non-farm payroll report due for release on Friday will provide further evidence on the state of the US economy and dictate the near term direction of the dollar although I believe the underlying trend remains higher and see this as a necessary correction with major support seen at 6875 and 6750.
Following the election and the favourable bearing on the market I have been focussing on stocks that may benefit over the coming months. () the UK’s largest listed independent aggregates business should be a key benefactor of the recently-announced public spending plans on infrastructure and investment in housing.
The Jersey-based company with over 500 million tonnes of mineral reserves in 53 quarries as well as 27 asphalt and 60 concrete plants has announced a series of positive updates accompanied by a strong outlook. Full-year results on 3rd March revealed a pre-tax profit of £21.4 million in 2014 almost double the £11.0 million generated in 2013 while low oil prices enabled its operating margin to grow from 12.6% to 14.3%.
Breedon spent £33.4 million on acquisitions in 2014 combined with a further £15.4 million on investments and other capital projects. Cash flow generated from ongoing activities grew by two-thirds last year which illustrates the group’s significant operational gearing and will fund further investments as the group hopes to consolidate a largely fragmented aggregates industry by making bolt-on acquisitions.
A first-quarter trading statement on 17th April showed the year started strongly as sales revenue increased by around 30% compared to the same period last year with acquisitions contributing about half of this growth. Peter Tom CBE Chairman of said “The outlook for UK construction and consequently the demand for our products continues to be positive. The main political parties have emphasised their commitment to investment in housing and infrastructure which should drive growth after the election.”
The chart of Breedon reflects the market uncertainty ahead of the election with the shares retracing back towards major support at 45p. The bullish divergence evident from the oscillators suggests there has been little momentum behind the sell-off indicating only a small amount of buying might be needed to propel the shares higher.
While Breedon is not cheap on 18x prospective earnings the company is forecast to grow by 27% next year putting it on an attractive PEG of 0.67. The market leader is asset backed has strong cash flow and will make additional acquisitions to take advantage of a growing sector. At the time of writing the share price is 45.125p which I believe offers a good entry point with targets seen at 47.38p 49.85p and 56.4p. Traders might consider a stop-loss below support at 43.32p to minimise risk.
This report was written by Mark Allen – Head of Derivatives at SI Capital Stockbrokers. The writer does not hold a position in but client accounts may. The material in this report has come from SI Capital internal data sources Simply Charts and ’ corporate website.
Legal Disclaimer:
MENAFN provides the information “as is” without warranty of any kind. We do not accept any responsibility or liability for the accuracy, content, images, videos, licenses, completeness, legality, or reliability of the information contained in this article. If you have any complaints or copyright issues related to this article, kindly contact the provider above.